By Peter H. Lindert, Distinguished Professor of Economics, University of California, Davis1
Prof. Lindert will be delivering the 5th Angus Maddison Lecture on 3 October 2017
as part of the OECD Development Centre’s Angus Maddison Lecture Series
during DEV WEEK 2017.
Learn more and register to attend
A global history of how governments redistribute between rich and middle and poor is unfolding. While such an account can start from new measures of fiscal progressivity in the 21st century, several countries can trace the history of fiscal redistribution in detail back to the 1960s, and then in broad outline back to the start of the 20th century.
What that history shows is a global rise in progressivity over the last 100 years. Earlier regimes took less and gave less. Before 1910, redistribution favoured the poor at the expense of the rich only in Britain and the Netherlands during the French War era of 1792 to 1815, as much as it did in the still-penurious government budgets around 1910. Why had Robin Hood still not arrived as late as the dawn of the 20th century? Three restraints blocked progressivity before the 20th century: pervasive poverty (only small surpluses were available to redistribute), lack of fiscal capacity and the delay in extending voting power to the masses, including women.
But, were there reversals to progressivity since 1980? Even if brief retreats toward regressivity show up in estimates, they were soon erased. For example, the Thatcher-Reagan revolution and the Bush tax cuts were smaller than the century-long rise of progressivity. Similarly, while Sweden retreated from progressive redistribution since 1983, the country still shifts a greater share of national income down the income ranks than at any time before 1976. The most striking example of reversion to regressivity, aside from the collapse of Communism, was missed by the usual post-1980 debate because it occurred far from the rich-country core, and before 1980. Chile, perhaps, achieved history’s greatest reversion during Pinochet’s initial crackdown and “reforms” of 1973-1980. The reversion was short-lived, however. Since 1990, Chile’s return to democracy caused a dramatic shift toward progressivity.
This picture of progressivity’s rise can be further defined. Consider the long-rise of hidden progressivity in the form of adults’ higher and more equal market earning power due to public education funding, which has important implications for the debate on rising inequality since the 1970s. Thanks to the Lee and Lee (2016)2 estimates of educational attainments since 1870, we can now calculate that the rise of public education also brought a dramatic drop in the inequality (gini) of educational attainments amongst adults. Public spending on mass education in any given year equalises adult skills and earning power later on. Yet, conventional calculations of fiscal incidence have missed the key leveling influence of government budgets in all developed countries. The usual calculations treat public schooling as if it were just a short-run service, like babysitting. By comparing the distributions of taxes and expenditures only within a single year, they miss effects that stretch over many years. Given that fiscal incidence has not retreated toward regressivity, the rise in income inequality owes nothing to a net shift away from progressive budgeting. The widening of income gaps since the 1970s has its origins in market forces, not in fiscal incidence favouring the rich.
So, what could happen to progressivity in the future? Two recent conjectures seem unlikely, while a third seems most deserving of policy responses.
First, many have imagined that the rise of pre-fisc inequality itself could spark an egalitarian political shift. Yet history tends to contradict the idea that pre-fisc inequality breeds progressive redistribution. In the United States, for example, that would have predicted that the masses would have extracted more money from the rich under Presidents Taft or Coolidge than they did under Roosevelt or Truman.
A second imagined source of opposition to progressive social spending relates to an immigration backlash. Might immigration undermine the welfare state and reverse the advance of progressive redistribution, as some have suggested? The threat seems real, yet the mechanism is not so obvious. The outcome would surely depend on the form that the backlash takes. Social insurance would face no obvious threat if immigrants were completely shut out, filtered on the basis of skills or discriminated against in the provision of social services. Only if a country admitted large numbers of less-skilled immigrants and declined to discriminate against them in social services would the accompanying tensions threaten progressive redistribution. Germany and Sweden seem to face the highest likelihood of such a dilution of welfare state benefits given the mass influx of Syrian, Iraqi, Afghan and other refugees since 2014. Still, the dilution has not happened yet.
Rather, the clearest threat to progressive social spending seems to come from population aging and political “gray power.” All populations, with the exception of Africa, are aging faster than careers are lengthening, thus raising the share of adult life spent in retirement. In addition, and perhaps in response, policy has shifted toward helping the elderly and keeping them out of poverty, as the OECD and others show. A rise in the share of adult life spent in retirement clearly calls for a drop in average consumption levels of retirees relative to the average earnings of those still working. Yet, few countries have made necessary policy adjustments. Aging and gray power threaten to erode, slowly but surely, the progressive social spending on children and adults under 65, hurting both progressivity and economic growth.
1.↩ Based on the longer discussion paper prepared for the upcoming 5th Angus Maddison Development Lecture, to be delivered at the OECD Development Centre’s Angus Maddison Lecture Series on 3 October 2017, entitled “The Rise and Future of Progressive Redistribution.”
2.↩ Lee, Jong-Wha and Hanol Lee. 2016. “Human Capital in the Long Run” Journal of Development Economics 122 (2016) 147–69.